ch05_tb

CHAPTER 5MANAGEMENT ACCOUNTING INFORMATION

FOR ACTIVITY AND PROCESS DECISIONS

TRUE/FALSE

1. Sunk costs are never relevant costs for decision making.a. Trueb. False

2. An example of a sunk cost is the amount of a guaranteed contract that has not yet been paid.a. Trueb. False

3. Personal employee responses are not critical considerations for the business decision maker.a. Trueb. False

4. For decision-making, differential costs assist in choosing between alternatives.a. Trueb. False

5. For a particular decision, differential revenues and costs are always relevant.a. Trueb. False

6. A cost may be relevant for one decision, but not relevant for a different decision.a. Trueb. False

7. Avoidable costs should be evaluated when deciding whether to discontinue a part, product, product line, or business segment.a. Trueb. False

8. In make-or-buy decisions, facility-sustaining support costs are unavoidable if the facility can be converted to another use.a. Trueb. False

9. For one-time-only special orders, flexible costs may be relevant but not capacity-related costs.a. Trueb. False

AKY 4E Test Bank Chapter 5 Schoenebeck

10. Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders. a. Trueb. False

11. When opportunity costs exist, they are always relevant.a. Trueb. False

12. Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.a. Trueb. False

13. When replacing an old machine with a new machine, the book value of the old machine is a relevant cost.a. Trueb. False

14. If a company is deciding whether to outsource a part, the reliability of the supplier is an important factor to consider.a. Trueb. False

15. Sometimes qualitative factors are the most important factors in make-or-buy decisions.a. Trueb. False

16. If a company is deciding whether to outsource a part, the reliability of the supplier is an important factor to consider.a. Trueb. False

17. Outsourcing is risk-free to the manufacturer because the supplier now has the responsibility of producing the part.a. Trueb. False

18. The central goal of the facility layout design process is to streamline operations to increase operating income.a. Trueb. False

19. In a process layout, batch production causes inventory costs. a. Trueb. False


20. The reduction of setup costs makes smaller batch sizes more feasible.a. Trueb. False

21. In batch processing, workers downstream can identify an upstream problem immediately.a. Trueb. False

22. The theory of constraints focuses on long-term initiatives to increase operating income.a. Trueb. False

23. A processing cycle efficiency (PCE) of 14% indicates better efficiency than a PCE of 50%.a. Trueb. False

24. When using a just-in-time manufacturing, a problem anywhere in the system can stop all production.a. Trueb. False

25. Implementing a just-in-time inventory system requires a major cultural change for an organization.a. Trueb. False

26. Global competition led to the development of international quality standards such as ISO 9000 2000 Standards. a. Trueb. False

27. External quality problems are expensive to fix.a. Trueb. False

28. Experience shows that it is more expensive to prevent defects than to detect and repair them. a. Trueb. False


MULTIPLE CHOICE

29. Sunk costs: a. are relevantb. are differentialc. have future implicationsd. are ignored when evaluating alternatives

30. A computer system installed last year is an example of: a. a sunk costb. a relevant costc. a differential cost d. an avoidable cost

31. Costs that cannot be changed by any decision made now or in the future are:a. fixed costsb. indirect costsc. avoidable costsd. sunk costs

32. For decision making, a listing of the relevant costs: a. will help the decision maker concentrate on the pertinent datab. will only include future costsc. will only include costs that differ among alternativesd. should include all of the above

33. Which of the following costs are NEVER relevant in the decision-making process?a. capacity-relatedb. historical costsc. relevant costsd. variable costs

34. When deciding to lease a new cutting machine or continue using the old machine, the following costs are all relevant EXCEPT the:a. $50,000 cost of the old machineb. $20,000 cost of the new machinec. $10,000 selling price of the old machined. $3,000 annual savings in operating costs if the new machine is purchased

35. In evaluating different alternatives, it is useful to concentrate on:a. flexible costsb. capacity-related costsc. total costsd. relevant costs


36. Relevant costs of a make-or-buy decision include all EXCEPT:a. fixed salaries that will not be incurred if the part is outsourcedb. current direct material costs of the partc. special machinery for the part that has no resale valued. material-handling costs that can be eliminated

37. Which of the following would NOT be considered in a make-or-buy decision?a. capacity-related costs that will no longer be incurred b. flexible costs of production c. potential rental income from space occupied by the production area d. unchanged supervisory costs

38. Relevant costs in a make-or-buy decision of a part include: a. setup overhead for the manufacture of the product using the outsourced partb. currently used manufacturing capacity that has alternative usesc. annual plant insurance costs that will remain the samed. corporate office costs that will be allocated differently

39. When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT:a. analyze product costsb. consider the impact of the special order on future prices of their productsc. determine whether excess capacity is availabled. verify past design costs for the product

40. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:a. incremental revenues exceed incremental costsb. additional capacity-related costs must be incurred to accommodate the orderc. the company placing the order is in the same market segment as your current

customersd. None of the above is correct.

41. When deciding whether to discontinue a segment of a business, managers should focus on:a. equipment used by the segment that could become idleb. reallocation of corporate costsc. how total costs differ among alternativesd. operating income per unit of the discontinued segment

42. Costs are relevant to a particular decision if they:a. are flexible costsb. are capacity-related costsc. differ across the alternatives being consideredd. remain unchanged across the alternatives being considered


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 43 THROUGH 46.Flowers-For-Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New vanOriginal cost $100,000 $180,000Annual operating cost $ 35,000 $ 20,000Accumulated depreciation $ 60,000 ---Current salvage value of the existing van $ 45,000 ---Remaining life 10 years 10 yearsSalvage value in 10 years $ 0 $ 0Annual depreciation $ 4,000 $ 18,000

43. Sunk costs include:a. the original cost of the existing vanb. the original cost of the new vanc. the current salvage value of the existing vand. the annual operating cost of the new van

44. Relevant costs for this decision include:a. the original cost of the existing vanb. accumulated depreciationc. the current salvage value of the existing vand. the salvage value in 10 years

45. If Flowers-For-Everyone replaces the existing delivery van with the new one, over the next 10 years operating income will:a. decrease by $180,000b. increase by $150,000c. decrease by $150,000d. None of the above is correct.

46. Should Flowers-for-Everyone replace the existing van with the new van? What are the savings or additional cost?a. Yes replace, net savings of $15,000b. Yes replace, net savings of $150,000c. No replace, additional costs of $120,000d. No replace, additional costs of $30,000


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 47 AND 48.Jim’s 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:

Geo Prizm Honda CivicAcquisition cost $15,000 $3,000Repairs $ 3,000 ---Annual operating costs (Gas, maintenance, insurance) $ 2,280 $2,100

47. The cost(s) NOT relevant for this decision is(are):a. the acquisition cost of the Geo Prizmb. the acquisition cost of the Honda Civicc. the repairs to the Geo Prizmd. the annual operating costs of the Honda Civic

48. What should Jim do? What are his savings in the first year?a. Buy the Honda Civic; $9,780b. Fix the Geo Prizm; $5,518c. Buy the Honda Civic; $180d. Fix the Geo Prizm; $5,280

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 49 THROUGH 51.Konrade’s Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

Direct materials $ 40,000Direct labor 10,000Flexible support costs 30,000Capacity-related support costs 20,000 Total costs $100,000

It is estimated that 10% of the capacity-related support costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade’s Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.

49. If Konrade’s Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:a. $ 82,000b. $ 98,000c. $ 50,000d. $100,000


50. If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:a. increase by $2,000b. increase by $80,000c. decrease by $3,000d. decrease by $85,000

51. The maximum price that Konrade’s Engine Company should be willing to pay the outside supplier is:a. $80 per TE456 partb. $82 per TE456 partc. $98 per TE456 partd. $100 per TE456 part

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 AND 53.Melodee’s Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

Direct materials $0.25Direct labor 0.03Unit-related support costs 0.10Batch-related support costs 0.12Product-sustaining support costs 0.22Facility-sustaining support costs 0.28 Total cost per jar $1.00

52. The relevant cost per jar is:a. $0.28 per jarb. $0.38 per jarc. $0.72 per jard. $1.00 per jar

53. The maximum price that Melodee’s Preserves should be willing to pay for the decorative jars is:a. $0.28 per jarb. $0.38 per jarc. $0.72 per jard. $1.00 per jar


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 54 AND 55.Denly Company has three products, A, B, and C. The following information is available:

Product A Product B Product CSales $60,000 $90,000 $24,000Flexible costs 36,000 48,000 15,000Contribution margin 24,000 42,000 9,000Capacity-realted costs: Avoidable 9,000 18,000 6,000 Unavoidable 6,000 9,000 5,400Operating income $ 9,000 $15,000 $ (2,400 )

54. Denly Company is thinking of dropping Product C because it is reporting a loss. Assuming Denly drops Product C and does not replace it, operating income will:a. increase by $2,400b. increase by $3,000c. decrease by $3,000d. decrease by $5,400

55. Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:a. increase by $6,600b. increase by $9,000c. increase by $12,000d. increase by $14,400

56. Which of the following does NOT need to be considered when evaluating a make-or-buy decision?a. savings from an alternative use of the production equipmentb. the original cost of the production equipmentc. the quality of the supplier's productd. the reliability of the delivery schedule

57. When making decisions:a. quantitative factors are the most importantb. qualitative factors are the most importantc. appropriate weight must be given to both quantitative and qualitative factorsd. both quantitative and qualitative factors are unimportant

58. Employee morale at Dos Santos, Inc., is very high. This type of information is known as:a. a qualitative factorb. a quantitative factorc. a differential factord. an opportunity cost


59. Which of following are risks of outsourcing the production of a part?a. unpredictable qualityb. unreliable deliveryc. unscheduled price increasesd. All of the above are risks of outsourcing.

60. Which of the following minimize the risks of outsourcing?a. the use of short-term contracts that specify priceb. the responsibility for on-time delivery is now the responsibility of the supplierc. building close relationships with the supplierd. All of the above minimize the risks of outsourcing.

61. When evaluating a make-or-buy decision, which of the following does NOT need to be considered?a. alternative uses of the production capacityb. the original cost of the production equipmentc. the quality of the supplier's productd. the reliability of the supplier's delivery schedule

62. In __________, all similar equipment or functions are grouped together.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production

63. Characteristics of a process layout include:a. continuous processingb. long production pathsc. small amounts of inventoryd. no work-in-process storage areas

64. In _______, equipment is organized to accommodate the production of a specific product.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production

65. Characteristics of a product layout include:a. raw materials and purchased parts are delivered directly to the production line where

they are neededb. low-volume productionc. a U-shaped layoutd. small batches of unique products


66. In __________, the plant is organized into areas where all machines used to manufacture a group of similar products are close to each other.a. a process layoutb. a product layoutc. cellular manufacturingd. just-in-time production

67. Characteristics of cellular manufacturing include:a. a layout that is usually circular like a cellb. increasing the number of employees needed to produce a productc. individual areas for employees so each can work independently without interruptiond. a flexible layout that can be easily adjusted to make a different product

68. The theory of constraints:a. emphasizes long-term optimizationb. maintains that maximizing volume through production bottlenecks will increase

operating incomec. helps managers make special one-time decisionsd. suggests that some component parts should be outsourced

69. Constraints may include: a. the availability of direct materials in manufacturingb. linear square feet of display space for a retailerc. direct labor in the service industryd. All of the above are correct.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 70 THROUGH 74.Braun’s Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model ZSelling price $50 $60 $70Direct materials 6 6 6Direct labor ($12 per hour) 12 12 24Variable support costs ($4 per machine-hour) 4 8 8Fixed support costs 10 10 10

70. Which model has the greatest contribution margin per unit?a. Model Xb. Model Yc. Model Zd. both Models X and Y

71. Which model has the greatest contribution margin per machine-hour?a. Model Xb. Model Yc. Model Zd. both Models Y and Z


72. If there is excess capacity, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models X and Y

73. If there is a machine breakdown, which model is the most profitable to produce?a. Model Xb. Model Yc. Model Zd. both Models Y and Z

74. How can Lisa Braun encourage her salespeople to promote the more profitable model?a. Put all sales persons on salary.b. Provide higher sales commissions for higher priced items.c. Provide higher sales commissions for items with the greatest contribution margin per

constrained resource.d. Both (b) and (c) are correct.

75. High levels of inventory result in all EXCEPT:a. high moving, handling, and storage costsb. increased product obsolescence and damagec. increased financing costsd. idle facilities

76. The implementation of just-in-time production results in all of the following EXCEPT:a. decreased cycle timesb. reduced amount of wastec. a slower pace for employeesd. structural changes

77. Characteristics of just-in-time manufacturing include all of the following EXCEPT:a. the ability to process items in large batchesb. making a product only when the customer requires itc. no work-in-process inventoriesd. a problem anywhere can stop production

78. Measures of JIT (just-in-time) manufacturing reliability include all of the following EXCEPT:a. defect ratesb. labor and machine utilization ratiosc. cycle timesd. percent of on-time deliveries

79. Of the four quality costing categories, the most damaging category to the organization is:a. prevention costsb. appraisal costsc. internal failure costsd. external failure costs


80. __________ are incurred when a defective component is discovered before shipment to the customer.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costs

81. _________ are incurred when a customer discovers a defect.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costs

82. Training employees in methods to maintain quality is an example of __________. a. prevention costsb. appraisal costsc. internal failure costsd. external failure costs

83. __________ include the cost of raw-materials inspections and assembly-line inspections.a. Prevention costsb. Appraisal costsc. Internal failure costsd. External failure costs


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 84 THROUGH 88.Umberger Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

Before the change After the changeTotal annual sales $600,000 $800,000Costs as a percentage of sales:

Direct materials 23% 20%Direct labor 9% 7%Support costs 18% 13%

Work-in-process inventory $125,000 $ 90,000

Inventory carrying costs are estimated to be 10% per year.

84. As a result of the layout reorganization, reduced levels of work-in-process inventory are projected to decrease inventory carrying costs by:a. $12,500b. $ 9,000c. $ 6,000d. $ 3,500

85. As a result of the layout reorganization, incremental manufacturing costs are projected to: a. increase by $84,000b. increase by $20,000c. decrease by $20,000d. decrease by $16,500

86. As a result of switching to a cellular manufacturing operation, total benefits are projected to increase by:a. $216,500b. $200,000c. $183,500d. $176,500

87. After the change, a decreased amount of work-in-process inventory is projected because:a. of reduced cycle times resulting from a more continuous production flowb. of lower financing costs and the reduced need for storage and handlingc. larger batches can be processed faster and more efficientlyd. All of the above are correct.

88. After the change, direct labor costs as a percentage of sales are projected to decrease because:a. less work-in-process inventory needs to be moved from location to locationb. fewer employees are needed to produce a product due to the new work designc. less supervisors are needed to oversee operationsd. All of the above are correct.


THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 89 THROUGH 93.Vander Belt Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

Before the change After the changeTotal annual sales $500,000 $750,000Costs as percentage of sales:


Work-in-process inventory $100,000 $ 80,000


89. As a result of the layout reorganization, reduced levels of work-in-process inventory are projected to decrease inventory carrying costs by:a. $ 2,200b. $ 7,500c. $ 8,800d. $11,000

90. As a result of the layout reorganization, incremental manufacturing costs are projected to:a. decrease by $22,800b. decrease by $25,000c. increase by $25,000d. increase by $40,000

91. As a result of switching to a cellular manufacturing operation, total benefits are projected to increase by:a. $222,800b. $227,200c. $272,800d. $277,200

92. After the change, sales are projected to increase because:a. of shorter delivery lead timesb. of higher sales pricesc. of the ability to process larger batch sizesd. All of the above are correct.

93. After the change, work-in-process carrying costs are projected to decrease because of: a. reduced costs in materials handlingb. lower financing costsc. the decreased need for inventory storaged. All of the above are correct.


EXERCISE / PROBLEM

94. Karen’s Cookie Company is considering replacing its giant cookie mixer with a new one. The following data have been compiled to evaluate the decision.

Existing NewOriginal cost $8,000 $10,000Annual operating cost $4,000 $2,200Remaining life 5 years 5 yearsDisposal value now $3,000 ---

Required:a. What costs are relevant?b. What costs are sunk?c. What are the net cash flows assuming Karen’s Cookie Company purchases the new

cookie mixer?

95. Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost, convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:

Existing New Turbo OvenOriginal cost $60,000 $50,000Accumulated depreciation $ 5,000 ---Current salvage value $40,000 ---Remaining life 5 years 5 yearsAnnual operating expenses $10,000 $ 7,500Disposal value in 5 years $ 0 $ 0

Required:a. What costs are sunk?b. What costs are relevant?c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the

new convection oven?d. What other items should Pat, as manager of the Pizzeria, consider when making this

decision?


96. Quiett Truck manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows:

Direct materials $ 45,000Direct labor 15,000Flexible support costs 35,000Capacity-related support costs 25,000 Total costs $120,000

Quiett Truck has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the capacity-related costs cannot be immediately converted to other uses.

Required:a. Describe avoidable costs. What amount of the WB23 production costs is avoidable?b. Should Quiett Truck outsource WB23? Why or why not?c. What other items should Quiett Truck consider before outsourcing any of the parts it

currently manufactures?

97. Freddie’s Fudge Factory currently makes fudge for retail and mail order customers. It also offers a variety of roasted nuts. Fudge sales have increased over the past year, so Freddie is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.85 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts:

Direct materials $0.50Direct labor 0.06Unit-related support costs 0.10Batch-related support costs 0.04Product-sustaining support costs 0.05Facility-sustaining support costs 0.15 Total cost per pound $0.90

Required:a. Should Freddie’s Fudge Factory outsource the roasted nuts? Why or why not?

Discuss all items that should be considered.

b. What incentives can Freddie offer the supplier of the roasted nuts to encourage continued reliability?


98. Kirkland Company manufactures a part for use in its production. When 10,000 items are produced, the costs per unit are:

Direct materials $0.60Direct manufacturing labor 3.00Flexible manufacturing support 1.20Fixed manufacturing support 1.60 Total $6.40

Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing support on the original item would be eliminated.

Required:a. What is the relevant per unit cost for the original part?b. Which alternative is best for Kirkland Company? By how much?

99. Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:

Direct materials $ 12Direct manufacturing labor 60Flexible manufacturing support 24Fixed manufacturing support 32 Total $128

Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing support on the original part would be eliminated.

Required:a. What is the relevant per unit cost for the original part?b. Which alternative is best for Lewis Auto Company? By how much?


100. Carey Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

Before the change After the changeTotal annual sales $700,000 $850,000Costs as percentage of sales:


Work-in-process inventory $200,000 $120,000


Required:a. Why do the layout reorganization estimates include

1. a decrease in work-in-process inventory?2. a decrease in direct material costs as a percentage of sales?3. an increase in sales?

b. As a result of the layout reorganization, what amount of change is projected 1. from carrying reduced levels of work-in-process inventory?2. for incremental manufacturing costs? 3. in total benefits?


CRITICAL THINKING / ESSAY

101. Are sunk costs considered relevant when choosing among alternatives? Explain.

102. Explain what revenues and costs are relevant when choosing among alternatives.

103. Assume you are a sophomore in college and are committed to earning an undergraduate degree. Your current decision is whether to finish college in four consecutive years or take a year off and work for some extra cash.a. Identify at least two revenues or costs that are relevant to making this decision.

Explain why each is relevant.b. Identify at least two costs that would be considered sunk costs for this decision.c. Comment on at least one qualitative consideration for this decision.

104. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers.

Identify for the restaurant management a. those costs that are relevant to this decision,b. those costs that are not differential,c. and qualitative considerations.

105. Are relevant revenues and costs the only information needed by managers to select among alternatives? Explain using examples.

106. Explain the differences between a process layout, a product layout, and cellular manufacturing.

107. A motorcycle manufacturer is currently using a conventional processing system. Recently work-in-process has been piling up at two stations along the assembly line. To eliminate this problem, management discussed the possibility of implementing just-in-time manufacturing. Discuss the advantages and concerns of implementing JIT.

108. In a just-in-time inventory system, explaina. why suppliers become very important to the overall manufacturing process, andb. what incentives can be offered to reward good suppliers.

109. Discuss the implications to employees of changing from a conventional manufacturing system to just-in-time production.

110. Discuss cost reductions that can result from reducing work-in-process inventory.

111. Snowboarding is a sport with a great amount of risk involved. On which type of quality costs should the snowboard manufacturer concentrate? Which costs should not be relied on? Explain why.


CHAPTER 5 SOLUTIONSMANAGEMENT ACCOUNTING INFORMATION

FOR ACTIVITY AND PROCESS DECISIONS

TRUE/FALSE

LO1 1. aLO1 2. aLO1 3. bLO2 4. aLO2 5. a

LO2 6. aLO2 7. aLO2 8. bLO2 9. aLO2 10. b

LO2 11. aLO2 12. bLO2 13. bLO3 14. aLO3 15. a

LO3 16. aLO3 17. bLO4 18. aLO4 19. aLO4 20. a

LO4 21. aLO5 22. bLO6 23. bLO6 24. aLO6 25. a

LO7 26. aLO8 27. aLO8 28. b

MULTIPLE CHOICE

LO1 29. dLO1 30. a

LO1 31. dLO2 32. dLO2 33. bLO2 34. aLO2 35. d

LO2 36. cLO2 37. dLO2 38. bLO2 39. dLO2 40. a

LO2 41. cLO2 42. cLO1 43. aLO2 44. cLO2 45. b

LO2 46. aLO2 47. aLO2 48. cLO2 49. aLO2 50. c

LO2 51. bLO2 52. dLO2 53. dLO2 54. cLO2 55. b

LO3 56. bLO3 57. cLO3 58. aLO3 59. dLO3 60. c

LO3 61. bLO4 62. aLO4 63. bLO4 64. bLO4 65. a

LO4 66. cLO4 67. dLO5 68. bLO5 69. dLO5 70. b

LO5 71. aLO5 72. bLO5 73. aLO5 74. cLO6 75. d

LO6 76. cLO6 77. aLO6 78. bLO7 79. dLO7 80. c

LO7 81. dLO7 82. aLO7 83. bLO8 84. dLO8 85. b

LO8 86. cLO8 87. aLO8 88. bLO8 89. aLO8 90. c

LO8 91. bLO8 92. aLO8 93. d


MULTIPLE CHOICE

45. New van ($20,000 x 10 years) – Existing van ($35,000 x 10 years) = $150,000 less in operating costs, which results in a $150,000 increase in operating income.

46. New van ($180,000) + $45,000 + (-$20,000 x 10 years) = costs of ($335,000)Existing van (-$35,000 x 10 years) = costs of ($350,000)Replacement results in net savings of $15,000

48. Geo ($3,000 + $2,280) - Honda ($3,000 + $2,100) = $180 cost savings with the Honda option

49. $40,000 + $10,000 + $30,000 + ($20,000 x 10%) = $82,00050. Avoidable costs $82,000 – ($85 x 1,000 units) = decrease of $3,00051. Avoidable costs $82,000 / 1,000 units = $82 per part52. All avoidable costs are relevant for this decision.53. Considering only quantitative factors, the company should not pay more than the avoidable

costs of $1.00 per jar. There may be qualitative factors that are also important.54. $24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate

profits. Without Product C, operating income would be $3,000 less than currently reported.55. $(3,000) + $12,000 = $9,00070. Model X $50 - $6 - $12 - $4 = $28

Model Y $60 - $6 - $12 - $8 = $34 **highestModel Z $70 - $6 - $24 - $8 = $32

71. Model X $50 - $6 - $12 - $4 = $28 / 1 = $28 **highest Model Y $60 - $6 - $12 - $8 = $34 / 2 = $17Model Z $70 - $6 - $24 - $8 = $32 / 2 = $16

72. Model Y since it has the greatest contribution margin per unit73. Model X since it has the greatest contribution margin per machine-hour

84. (Before: $125,000 x 10%) less (After: $90,000 x 10%) equals cost savings of $3,500.85. (Before: $600,000 x 50%) less (After: $800,000 x 40%) equals additional costs of $20,000.

86. Before the After theChange Change Difference

Sales $600,000 $800,000 $200,000Manufacturing costs (300,000) (320,000) (20,000)WIP inventory carrying costs (12,500 ) (9,000 ) 3,500 Total benefits $287,500 $471,000 $183,500

89. (Before: $100,000 x 11%) less (After: $80,000 x 11%) equals cost savings of $2,200.90. (Before: $500,000 x 40%) less (After: $750,000 x 30%) equals additional costs of $25,000.

91. Before the After theChange Change Difference

Sales $500,000 $750,000 $250,000Manufacturing costs (200,000) (225,000) (25,000)WIP inventory carrying costs (11,000 ) (8,800 ) 2,200 Total benefits $289,000 $516,200 $227,200


EXERCISE/PROBLEM

LO1,294. a. Relevant costs include the acquisition cost of the new giant cookie mixer, annual

operating costs for both the old and the new cookie mixers, and the current disposal value of the old mixer.

b. Sunk costs include the original cost of the existing cookie mixer.

c. Net cash flows over 5 years with the giant cookie mixer:

Cash inflow:Decrease in annual operating expenses ($1,800 x 5) $ 9,000Sale of the existing cookie mixer 3,000

Cash outflow:Acquisition of the new giant cookie mixer (10,000)

Net cash inflow (outflow) $ 2,000

LO1,2,395. a. Sunk costs include the original cost of the existing convection oven and the

accompanying accumulated depreciation.

b. Relevant costs include:Acquisition cost of the new Turbo ovenCurrent disposal value of the existing convection ovenAnnual operating expenses for the existing and the new Turbo oven

c. Net cash flows over 5 years with the new Turbo oven:

Cash inflow:Decrease in annual operating expenses ($2,500 x 5) $ 12,500Sale of the existing oven 40,000

Cash outflow:Acquisition of the new Turbo oven (50,000)

Net cash inflow (outflow) $ 2,500

d. Other items the manager should consider when making this decision include: The Turbo Oven’s reliability and efficiency is still unknown since it is a

brand new product. If the Turbo Oven bakes faster as it claims, the Pizzeria may be able to

increase sales due to the quicker baking time. Even though purchasing another oven just six months prior, top

management should consider the Turbo oven option, but they may also question the decision-making ability of Pat, the current manager.


LO2,396. a. Avoidable costs are those costs eliminated when a part, product, product line, or

business segmented is discontinued. Avoidable production costs for WB23 total $110,000, which are all but the $10,000 ($25,000 x 40%) of capacity-related costs that cannot be immediately converted to other uses.

b. Based on the financial considerations given, Quiett Truck should NOT outsource WB23 because the $112,000 (10,000 units x $11.20 per part) outsourced cost is greater than the $110,000 reduction in annual production costs. In other words, the outsourcing would cost Quiett Truck an additional $2,000 annually.

c. Other factors to consider include the supplier’s ability to meet expected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the future.

LO2,397. a. Because Freddie’s Fudge Factory can make use of the roasting space, it can be

assumed the facility-sustaining support costs are avoidable. Assuming the unit-related, batch-related, and product-sustaining support costs are also all avoidable costs, YES, Freddie’s Fudge should outsource the nuts because the $0.85 per pound of the supplier is less than the current $0.90 per pound cost to Freddie.

b. Freddie can offer the supplier prompt payment and a guaranteed total purchase volume to encourage continued reliability.


LO1,298. a. Direct materials $0.60

Direct manufacturing labor 3.00Flexible manufacturing support 1.20Avoidable fixed support 1.00 Total relevant per unit costs $5.80

b. Make Buy Effect of BuyingPurchase price $60,000 $(60,000)Savings in space (9,000) 9,000Direct materials $6,000 6,000Direct mfg. labor 30,000 30,000Flexible support 12,000 12,000Fixed support saved (10,000) 10,000Totals $48,000 $41,000 $7,000

The best alternative is to buy the part.

LO1,299. a. Direct materials $12

Direct manufacturing labor 60Flexible manufacturing support 24Avoidable fixed support 20 Total relevant per unit costs $116

b. Make Buy Effect of BuyingPurchase price $1,200,000 $(1,200,000)Savings in space (180,000) 180,000 Direct materials $120,000 120,000Direct manufacturing labor 600,000 600,000Flexible support 240,000 240,000Fixed support saved (200,000) 200,000 Totals $960,000 $820,000 $140,000

The best alternative is to buy the part.


LO4,8100. a. 1. Layout reorganization estimates include a decrease in work-in-process

inventory because cellular manufacturing streamlines production flows. When products flow immediately from one processing stage to the next, there is less build-up of work-in-process inventories.

2. When products flow immediately from one processing stage to the next, workers downstream can identify an upstream problem in that component almost immediately and correct it before it leads to the production of more defective components. Early detection of defective units reduces the amount of raw materials needed for rework, which results in decreased direct material costs as a percentage of sales.

3. A streamlined manufacturing operation leads to reduced manufacturing cycle times, improved quality, and a shorter lead-time for orders. Quicker delivery to customers and higher quality products usually result in increased customer sales.

b. 1. Carrying reduced levels of work-in-process inventory results in a projected cost savings of $9,600.

Before the change: $200,000 x 12% = $24,000After the change: $120,000 x 12% = 14,400 Cost savings $ 9,600

2. As a result of the layout reorganization, incremental manufacturing costs are projected to decrease by $5,000.

Before the change: $700,000 x 25% = $175,000After the change: $850,000 x 20% = 170,000 Cost savings $ 5,000

3. As a result of switching to a cellular manufacturing operation, total benefits are projected to increase by $164,600.

Before the After theChange Change Difference

Sales $700,000 $850,000 $150,000Manufacturing costs* (175,000) (170,000) 5,000WIP inventory carrying costs** (24,000 ) (14,400 ) 9,600 Total benefits $501,000 $665,600 $164,600

* Before the change: $700,000 x (10% + 6% + 9%) = $175,000After the change: $850,000 x (9% + 4% + 7%) = $170,000

** Before the change: $200,000 x 12% = $24,000After the change: $120,000 x 12% = $14,400


CRITICAL THINKING / ESSAY

LO1101. Are sunk costs considered relevant when choosing among alternatives? Explain.

Solution: No. Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Sunk costs by definition are those costs that have already been committed, cannot be changed, and will never differ among alternatives.

LO2102. Explain what revenues and costs are relevant when choosing among alternatives.

Solution: Amounts that differ among alternatives are considered relevant. Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making.

LO2,3103. Assume you are a sophomore in college and you are committed to earning an

undergraduate degree. Your current decision is whether to finish college in four consecutive years or take a year off and work for some extra cash.a. Identify at least two revenues or costs that are relevant to making this decision.

Explain why each is relevant.b. Identify at least two costs that would be considered sunk costs for this decision.c. Comment on at least one qualitative consideration for this decision.Solution:a. Relevant revenues/costs are those that differ between the alternatives of continuing

with college or taking a year off from college and working. Relevant costs for continuing your college education without a break include:1. Earnings lost next year due to the hours you are not able to work because of

classes and homework. 2. As a result of graduating a year earlier, higher wages will be earned a year

earlier as well.

b. Sunk costs for this decision include:1. Amounts paid for college tuition and books during the past two years.2. Amounts committed for college tuition and books for the remaining two years.

c. A qualitative consideration would include having different activities and priorities than your friends who are students, graduating later than students who started college the same time you did, and retaining information over the year off from school.


LO2,3104. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy

appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers.

Identify for the restaurant management a. those costs that are relevant to this decision,b. those costs that are not differential,c. and qualitative considerations.

Solution:For the decision of whether to update the restaurant’s image:a. Relevant costs include a one-time cost of the renovation for the updated image, a

change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation.

b. Costs that are not differential include replacing the menus and the carpet since they need to be replaced whether the image is updated or not.

c. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer the restaurant wants to attract.

LO3105. Are relevant revenues and costs the only information needed by managers to select among

alternatives? Explain using examples.Solution: No, relevant revenues and costs provide a financial analysis but they do not take into consideration qualitative implications. In a make-or-buy decision, examples of qualitative issues include the supplier’s ability to meet expected quality and delivery standards and the likelihood that suppliers increase prices of the components in the future.


LO4106. Explain the differences between a process layout, a product layout, and cellular

manufacturing.Solution: In process layouts, all similar equipment and functions are grouped together. Process layouts occur typically in organizations in which production is done in small batches of unique products. In process layouts, products are moved and processed from one area to another until the product is completed.

In contrast, in product layouts, equipment is organized to accommodate the production of a specific product. Product layouts are most effective for companies producing high-volume products. Typically products are moved and are processed along an assembly line.

Meanwhile, cellular manufacturing involves the organization of a plant into a number of cells. Within each cell, machines that are needed to manufacture a group of similar products are arranged close to one another. The organization reduces production cycle time, which is the time from receipt of raw materials from the supplier to delivery of the finished goods.

LO6107. A motorcycle manufacturer is currently using a conventional processing system. Recently

work-in-process has been piling up at two stations along the assembly line. To eliminate this problem, management discussed the possibility of implementing just-in-time manufacturing. Discuss the advantages and concerns of implementing JIT.Solution: The advantages of implementing just-in-time manufacturing include fewer inventories, which generally result in reduced cycle time, improved quality, and reduced waste. Concerns include establishing and maintaining good relations with reliable suppliers and the structural and cultural change in the work environment.

LO3,6108. In a just-in-time inventory system, explain

a. why suppliers become very important to the overall manufacturing process, andb. what incentives can be offered to reward good suppliers. Solution:a. In a just-in-time inventory system, suppliers are very important because if good

quality raw materials are not delivered in a timely manner, the entire processing system will shut down.

b. Incentives that can be offered to reward good suppliers include prompt payment and guaranteed total purchase volume.


LO6109. Discuss the implications to employees of changing from a conventional manufacturing

system to just-in-time production.Solution: With the implementation of a just-in-time system, employees have to adapt to a new cultural work climate. Employees will have to adapt to structural changes in the work place to accommodate JIT, a faster work pace, and the concept of teamwork. JIT often relies on teamwork, which requires individuals that may have worked in isolation to subordinate their interests to those of the team.

LO6110. Discuss cost reductions that can result from reducing work-in-process inventory.

Solution: Decreasing work-in-process inventory results in reduced financing costs, decreased storage and handling costs, and increased sales due to improved manufacturing cycle times and shorter lead-time for orders.

LO7111. Snowboarding is a sport with a great amount of risk involved. On which type of quality

costs should the snowboard manufacturer concentrate? Which costs should not be considered? Explain why.Solution: In regard to quality, snowboard manufacturers should concentrate on prevention costs so that only high quality snowboards are manufactured. Emphasis should be placed on quality engineering so the product is competitive and reliable. The use of external failure costs could put the company out of business. Lawsuits regarding defective snowboards causing or attributing to bodily injury on the ski slopes could ruin a snowboard manufacturer by damaging its reputation or by awarding damages of such magnitude that the costs would bankrupt the company.


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